International Business: The Challenges of

Globalization
Ninth Edition, Global Edition

Chapter 9
International Financial Markets

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Learning Objectives
9.1 Explain the importance of the international capital
market.
9.2 Describe the main components of the international
capital market.
9.3 Outline the functions of the foreign exchange market.
9.4 Explain the different types of currency quotes and
exchange rates.
9.5 Describe the instruments and institutions of the foreign
exchange market.

Copyright © 2019 Pearson Education Ltd.

Wii Is the Champion
• Nintendo (www.nintendo.com)
• Global Gaming Industry:
Nintendo’s Wii has sold more
than 100 million Wii units
• Shifting yen values affect
Nintendo’s performance
– Foreign exchange loss of
¥ 92.3 billion ($923.5
million)

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Importance of the International Capital Market
Purposes of National Capital Markets
Capital Market: System that allocates financial resources in
the form of debt and equity according to their most efficient
uses
• Debt
– Bond
• Equity
– Stock
 Liquidity

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Importance of the International Capital Market
Purposes of International Capital Markets
International capital market: Network of individuals,
companies, financial institutions, and governments that
invest and borrow across national boundaries
• Expands the money supply for borrowers
•Reduces the cost of money for borrowers
•Reduces risk for lenders

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Importance of the International Capital Market
Forces Expanding the International Capital Market
• Information Technology
• Deregulation
• Financial Instruments
– Securitization

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Importance of the International Capital Market
World Financial Centers

Offshore Financial Centers

• Operational centers
– London, Switzerland…
• Booking centers
– Cayman Islands, Bahamas…

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Quick Study 1
1. What is the purpose of the international capital market?
2. Unbundling and repackaging hard-to-trade financial
assets into more marketable financial instruments is
called what?
3. What is a characteristic of an offshore financial center?

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International Capital Market Components (1 of 4)

International Bond Market: Market consisting of all bonds

sold by issuing companies, governments, or other
organizations outside their own countries.
Types of International Bonds
• Eurobond: Bond issued outside the country in whose currency
it is denominated.
• Foreign Bond: Bond sold outside the borrower’s country and
denominated in the currency of the country in which it is sold.
Interest Rates: A Driving Force

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International Capital Market Components (2 of 4)

International Equity Market: Market consisting of all

stocks bought and sold outside the issuer’s home country.
Drivers
• Spread of Privatization
• Economic Growth in Emerging Markets
• Activity of Investment Banks
• Advent of Cybermarkets

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International Capital Market Components (3 of 4)

• Eurocurrency Market: Market consisting of all the world’s

currencies that are banked outside their countries of origin:
– U.S. dollars deposited in a bank in Tokyo are called
Eurodollars.
– British pounds deposited in New York are called
Europounds.
– Japanese yen deposited in Frankfurt are called Euroyen.
• Sources of Eurocurrency deposits
– Governments
– Commercial banks
– International companies
– Extremely wealthy individuals

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International Capital Market Components (4 of 4)

Appeal of the Eurocurrency Market

Appealing Feature Nonappealing Feature

• Absence of regulation • Greater risk of default
– Reduces transaction costs – Yet, fairly safe
– Interbank interest rates
 London Interbank Offer
Rate (LIBOR)
 London Interbank Bid
Rate (LIBID)

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Quick Study 2
1. What type of financial instrument is traded in the
international bond market?
2. The market of all stocks bought and sold outside the
issuer’s home country is called what?
3. What does the Eurocurrency market consist of?

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Functions of the Foreign Exchange
Market
Conversion
• To facilitate transactions, invest directly abroad, or repatriate
profits
Hedging
• Insure against potential losses from adverse exchange-rate
changes
Arbitrage
• Instantaneous purchase and sale of a currency in different
markets for profit
Speculation
• Sequential purchase and sale (or vice-versa) of a currency
for profit
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Quick Study 3
1. What is the market in which currencies are bought and
sold and their prices are determined?
2. Insuring against potential losses that may result from
adverse changes in exchange rates is called what?
3. What do we call the instantaneous purchase and sale
of a currency in different markets to make a profit?

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Currency Quotes and Rates

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Quoting Currencies (1 of 2)
Direct and Indirect Rate Quotes

1 Exchange rates between the

Direct quote  U.S. dollar and a number of
Indirect quote
other currencies

1 Country (Currency) Currency per U.S. $

Indirect quote 
Direct quote Japan (yen) 84.3770

Jordan (dinar) 0.7057

Kenya (shilling) 81.0200

Kuwait (dinar) 0.2885

Lebanon (pound) 1,507.39

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Quoting Currencies (2 of 2)
• Cross Rate: Exchange rate calculated using two other exchange rates

Table 9.2 Key Currency Cross Rates

Blank Dollar Euro Yen Pound Swiss Canadian

Franc Dollar
Canada 1.0646 1.3505 0.0126 1.6345 1.047 ...
6
Switzerland 1.0163 1.2892 0.0120 1.5603 ... 0.9546

Britain 0.6513 0.8262 0.0077 ... 0.640 0.6118

9
Japan 84.454 107.13 ... 129.66 83.10 79.330
2
Euro area 0.7883 ... 0.0093 1.2103 0.775 0.7405
7
United ... 1.2686 0.0118 1.5354 0.984 0.9393
States 0

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Spot Rates
Spot Rate:
• Exchange rate requiring delivery of the traded currency
within two business days
Spot Market:
• Market for currency transactions at spot rates
Buy and Sell Rates:
• A markup

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Forward Rates
Forward Rate:
• Exchange rate at which two parties agree to exchange
currencies on a specified future date
Forward Market:
• Market for currency transactions at forward rates
Forward Contract:
• Contract that requires the exchange of an agreed-on
amount of a currency on an agreed-on date at a specified
exchange rate

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Swaps, Options, and Futures
Currency Swap:
• Simultaneous purchase and sale of foreign exchange for
two different dates
Currency Option:
• Right, or option, to exchange a specified amount of a
currency on a specified date at a specified rate
Currency Futures Contract:
• Contract requiring the exchange of a specified amount of
currency on a specified date at a specified exchange rate,
with all conditions fixed and not adjustable
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Quick Study 4
1. The numerator in a quoted exchange rate, or the
currency with which another currency is to be purchased,
is called a what?
2. What is the name given to the risk of adverse changes in
exchange rates?
3. What do we call an exchange rate requiring delivery of a
traded currency within two business days?
4. What instruments are used in the forward market?

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Market Instruments and Institutions
Trading Centers
Figure 9.1 Financial Trading Centers by Time Zone

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Market Instruments and Institution (1 of 2)
Interbank Market
• Market in which the world’s largest banks exchange currencies at spot
and forward rates
• Clearing: Process of aggregating the currencies that one bank owes
another and then carrying out the transaction
Securities Exchange
• Exchange specializing in currency futures and options transactions
Over-the-Counter (OTC) Market
• Decentralized exchange encompassing a global computer network of
foreign exchange traders and other market participants
Convertible (Hard) Currency
• Currency that trades freely in the foreign exchange market, with its
price determined by the forces of supply and demand
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Market Instruments and Institution (2 of 2)
Instruments for Restricting Currencies
• Policies for restricting currency convertibility include:
– Central bank approval
– Import licenses
– Multiple exchange rate system
– Import deposit requirements
– Quantity restrictions
• Countertrade: Practice of selling goods or services that are
paid for, in whole or in part, with other goods or services

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Quick Study 5
1. Where does more than half of all global currency trading
take place?
2. A currency used as an intermediary to convert funds
between two other currencies is called a what?
3. What is another name for a freely convertible currency?
4. Why do governments sometimes engage in currency
restriction?

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Copyright

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